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Economic Commission for Africa African Union

ECONOMIC REPORT ON AFRICA

2013

Making the Most of Africas Commodities:Industrializing for Growth, Jobs and Economic Transformation


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ECONOMIC REPORT ON AFRICA

2013

Making the Most of Africas Commodities:Industrializing for Growth, Jobs and Economic Transformation


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Ordering informationTo order copies of Making the Most of Africas Commodities: Industrializing for Growth, Jobs andEconomic Transformationby the Economic Commission for Africa, please contact:

Publications:Economic Commission for AfricaP.O. Box 3001Addis Ababa, Ethiopia

Tel: +251 11 544-9900Fax: +251 11 551-4416E-mail: [email protected]: www.uneca.org

United Nations Economic Commission for Africa, 2013Addis Ababa, Ethiopia

All rights reservedFirst printing March 2013

Sales No.: E.13.II.K.1ISBN-13: 978-92-1-125119-7eISBN: 978-92-1-056076-4

Material in this publication may be freely quoted or reprinted. Acknowledgement is requested,together with a copy of the publication.


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Table of Contents

Foreword

Executive Summary

1. Economic and Social Developments in Africa and Medium-term Prospects

2. Trade, Financing and Employment imperatives for Africas Transformation

3. State of Value Addition and Industrial Policy in Africa

4. Making the Most of Linkages in Soft (Food) Commodities

5. Making the Most of Linkages in Industrial Commodities

6. Making the Most of Policy Linkages in Commodities

A Statistical Note

Acronyms

Acknowledgements

4

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16

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Economic Report on Africa 2013

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Foreword

Africa is at a critical juncture in its developmenttrajectory. The global economic and geopoliticalchanges of the last two decades have shifted theglobal traditional power structures and witnessedthe emergence of new powers from the South. Thisshift, driven largely by a revolution in information

and communications technology, has led tosubstantial increases in cross-border capital flowsand trade in intermediate goods, thus reflectingthe rising importance of value chains. Changes indemography, rapid urbanization and a prolongedcommodity-price boom have also made hugeglobal changes, all of which present unprecedentedopportunities for Africa to overcome its legaciesand embark on a bold agenda that will see thecontinent emerge as a global economic power.

Given its remarkable growth since 2000, thecontinent has been hailed as the next frontier foropportunity and a potential global growth pole.Political conflicts have declined, economic growthis robust and economic management, governanceand political stability have improved. All havecontributed to a marked shift in global perceptionof the continent, from pessimism to enormouspotential, with both traditional and new economicpowers clamouring to offer their partnership.

Yet recent economic performance has not

generated enough economic diversification, jobgrowth or social development to create wealthand lift millions of Africans out of poverty. A keychallenge, therefore, is how Africa can pursuemore effective policies to accelerate and sustainhigh growth and make that growth more inclusiveand equitable. African countries must use thisglobal interest as springboard to achieving broadstructural transformation based on the needs andpriorities of Africans.

It is precisely because of these challenges thatthe theme of this years Economic Report on

Africa 2013is on Making the most of Africascommodities: industrializing for growth, jobs andeconomic transformation. This theme is importantbecause commodity-based industrialization can

provide an engine of growth for the continent,reducing its marginalization in the global economyand enhancing its resilience to shocks. Africancountries have a real opportunity, individually andcollectively, to promote economic transformationand to address poverty, inequality and youthunemployment. They can capitalize on theirresource endowments and high internationalcommodity prices as well as changes in how globalproduction processes are organized.

This report argues that the deindustrializationof many African economies over the lastthree decades, resulting in their increasingmarginalization in the global economy, was mainlythe result of inadequate policies and offers apolicy framework for these countries to triggerresource-based industrialization. Key among thecomponents of this framework is the need todesign and implement effective development plansand industrial strategies to address constraintsand tap opportunities for African countries to

African countries have a realopportunity, individually andcollectively, to promote economictransformation and to address poverty,inequality and youth unemployment.They can capitalize on their resource

endowments and high internationalcommodity prices as well as changesin how global production processesare organized.


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Making the Most of Africas Commodities: Industrializing for Growth, Jobs and Economic Transformation

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engage in value addition and commodity-basedindustrialization. For industrial policy to beeffective there is a need for policy space. ManyAfrican countries saw notable improvements inpolicy space especially before the recent globalfinancial crises thanks to prudent macroeconomic

management. Successful industrial policy wouldassist African countries strengthen and sustaintheir policy space through higher and sustainablegrowth rates and tax revenue.

This report also underscores the need for Africancountries to develop appropriate local contentpolicies, boost infrastructure, human skills andtechnological capabilities, and foster regionalintegration and intra-African trade. In this regard, theimplementation of the Continental Free Trade Area

(CFTA) and the regional and continental priorities ofthe Accelerated Industrial Development of Africas(AIDA) Action Plan, for example, will be crucial.

This report is based on nine studies of Africancountries, which have helped to generateevidence-based policy recommendations. Thestudies show that African countries are addingvalue to their commodities and developinglocal backward and forward linkages to the

soft, hard and energy commodity sectors. Butthe depth of linkages varies among countriesand value addition remains generally limited,mainly because of country- or industry-specificconstraints that require strategic and systematicindustrial policies.

The need for Africa to industrialize to accelerateand sustain growth, create jobs for millions ofits youth and achieve economic transformationmakes this report timely. It is our belief that this

report generates the kind of knowledge neededfor the discourse on policy choices for Africastransformative development.

Carlos LopesUnited Nations Under-Secretary-General

and Executive Secretary of UNECA

Nkosazana Clarice Dlamini-ZumaChairperson

Africa Union Commission


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AFRICAS IMPERATIVE TO INDUSTRIALIZEIN TODAYS GLOBAL CONTEXT

T

he global economy has, since the turn of thecentury, seen vast shifts in production andtrade patterns alongside the emergence of

new growth poles in the South. The rapid rise ofeconomic powers such as China, India and Brazil,the continuing financial and economic problemsof industrialized countries, and ways of doingbusiness revolutionized by advances in technologyhave taken the world into a new phase ofglobalization. This evolving order presents Africawith challenges as well as opportunities which, ifmet by effective policies, could lead to substantialsocio-economic and political transformation,propelling the continent as a new pole of global

growth.

Following two decades of near stagnation, Africasgrowth performance has improved hugely sincethe start of the 21st century. Since 2000 thecontinent has seen a prolonged commodityboom and sustained growth trend. And althoughgrowth slowed from an average of 5.6 per cent in20022008 to 2.2 per cent in 2009hit by theglobal financial crisis and steep food and fuel pricerisesAfrica quickly recovered with growth of 4.6per cent in 2010. The continents growth slipped

again in 2011 owing to political transition in NorthAfrica, but rebounded strongly once more to 5.0per cent in 2012, despite the global slowdown anduncertainty.

This remarkable performancealthough largelycommodity drivenis underpinned by a variety offactors, such as strengthening domestic demandassociated with rising incomes and urbanization,increasing public spending (especially oninfrastructure), bumper harvests in some regions

(due to favourable weather), tightening trade and

investment ties with emerging economies (linkedto their investment in Africas natural resource andextractive industries) and post-conflict economicrecovery in several countries. Africas medium-term growth prospects remain strong, too, at forexample 4.8 per cent in 2013 and 5.1 per cent in

2014.

Yet this impressive growth story has not translatedinto economic diversification, commensurate

jobs or faster social development: most Africaneconomies still depend heavily on commodityproduction and exports, with too little value additionand few forward and backward linkages to othersectors of the economy. Indeed, the pattern ofsocial development in Africa has been mixedover recent years: changes for the better are still

recorded in most areas (especially education, childand maternal mortality rates, and gender equality),but the pace is too slow for African countries toachieve their social development goals, especiallysome of the Millennium Development Goals by theend date of 2015.

The limited impact of commodity-driven growthon employment and social development has beenaggravated by liberalizing reforms and globalizationthat, in the absence of serious government policiesto promote economies productive capacities andability to compete in international markets, have lefta legacy of inappropriate incentives and institutionsthat threaten economic and political stability aswell as social cohesion. Major deficits in stateand institutional capacities, in physical and policyinfrastructure, as well as an inability to mitigateimpacts of external shocks have contributed tothe continents transformation challenge. Africancountries must therefore address the reasons whystronger growth and trade have not stimulatedeconomic diversification, job creation and socio-

economic development.

Executive Summary


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The key challenge for African countries todayis how to design and implement effective policiesto promote industrialization and economictransformation. Despite some gains in manufacturing

over the last decade, the continent is yet to reversethe de-industrialization that has defined its structuralchange in recent decades: in 19802010, its shareof manufacturing in aggregate output declined frommore than12 per cent to around 11 per cent, butremained at more than 31 per cent in East Asia,where labour-intensive industries induced high andsustained growth and helped lift hundreds of millionsof citizens out of poverty.

Africa has also lagged behind East Asia onother measures. That region has seen not onlysurging per capita income but also a soaringshare of global exports and income over the last

four decades (table 1). Industrial policies wereparticularly successful in East Asia because ofcommitted and visionary political leadership andinstitutions that designed and enforced strictperformance criteria for industries that receivedsubsidies and trade protection, supported bya capable bureaucracy largely insulated frompolitical capture.

TABLE 1: AS AFRICA DE-INDUSTRIALIZED, EAST ASIA WAS FIRING ON ALL CYLINDERS

1970 1980 1990 2000 2010

Africa

Real per capita GDP (US$) 246 900 780 740 1,701

Share in world output (%) 2.75 3.65 2.22 1.85 2.73Share in global exports (%) 4.99 5.99 3.02 2.31 3.33

East Asia

Real per capita GDP (US$) 335 1,329 3,018 4,731 8,483

Share in world output (%) 9.83 12.94 18.14 21.53 20.69

Share in global exports (%) 2.25 3.74 8.06 12.02 17.8

Source: World Bank, World Development Indicators, 2012.

Africas industrialization strategies have not,however, transformed its economies. The seedsof its woes were sown during the colonial periodbut the problem worsened after independencewith the failure of often externally generatedindustrial policies.

The colonial legacy is the result of the extractivenature of African colonialism, which left behind

structures, institutions, and infrastructure designed

to benefit non-Africans. For instance, the roadsand railways built in colonial times were primarilydesigned to transport minerals and other rawmaterials from the African interior to the continentsports for shipping to Europe. They were notdesigned to join one part of the continent toanother, and created a legacy that is still felt in thetwenty-first century, with production and exportof commodities geared towards the needs of the

former colonial powersnot value addition.


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Then comes the seesaw of policy failureafter independence: first, import substitutionpolicies under which African countries decidedto industrialize, then structural adjustment

programmes, which forced African countries tode-industrialize.

The continents early state-led industrializationstrategies that focused on import substitutionwere characterized by massive public investmentand ownership of enterprises and financialinstitutionsand a range of policy measuresincluding tariff and non-tariff barriers, creditcontrols and foreign exchange restrictions toprotect infant industries. But most governmentsdid not have the financial and managerial

capacity to operate public enterprises andfinancial institutions, and the policies intendedto direct investment towards industry distortedfactor prices and rates of return. Thus, whileimport-substitution strategies succeededelsewhereespecially in East Asiathey failedto ignite sustained industrialization in Africa,leading to mounting and unsustainable deficits,stagflation and debt crises in many countries bythe end of the 1970s.

To help African countries deal with unfoldingeconomic crises, the International MonetaryFund and the World Bank imposed structuraladjustment programmes in the 1980sand 1990s. Their theoretical premise wasthat markets are efficient but governmentinterventions are inefficient because they distortmarket signals. Hence, long-term developmentplanning was abandoned and industrialpolicies neglected in most African countries.The market-led development model removedinefficient government interventions but didnot create the conditions for developmentor address the numerous market failures inAfrican economies, such as a severe shortageof technical skills and entrepreneurship and lowrates of investment.

African governments focused on macroeconomicstability and institutional reforms to protectproperty rights and ensure contractenforcementoften on advice from donors andmultilateral development institutionsbut without

coherent strategies to address market failures

and externalities that constrained investment,growth and economic diversification.

Thus, Africas growth plummeted during thelost decades of the 1980s and 1990s whileunemployment soared, and production andexport bases became more concentrated. Andwithout industrial policies to address policyand market failures (especially of informationand coordination), African countries have beenunable, until now, to diversify and parlay recenthigh growth and increased trade into social andeconomic development.

More recently, the structure of the global systemhas made it practically impossible for Africa to

benefit from globalization or move up the valuechain, which requires Africa to influence theglobal agenda in its favour.

TRIGGERING COMMODITY-BASEDINDUSTRIALIZATION AS AN ENGINEOF GROWTH AND ECONOMICTRANSFORMATION

Africa boasts significant human and naturalresources that can be used to promoteindustrialization and structural economictransformation through value-addition strategiesin all sectors (agriculture, industry and services),though not all African countries are rich in naturalcommoditiessome are resource poor.As well asa growing, predominantly young and urbanizingpopulation, the continent is endowed with manynatural resources, including plentiful land andfertile soils, oil and minerals. Africa has about 12per cent of the worlds oil reserves, 42 per cent

of its gold, 8090 per cent of chromium andplatinum group metals, and 60 per cent of arableland in addition to vast timber resources.

With such abundance and rising global demandfor raw materials, African governments areforging new partnerships, boosting infrastructureinvestment and sharing skills and technology.

But Africa can do better. Primary commodityproduction and exports entail huge forgone

income through lack of value addition, the


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export of jobs to countries that can add value,and exposure to high risks due to dependenceon exhaustible commodities and fluctuationsin commodity demand and prices. Instead

of relying on exports of raw materials, thecontinent should add value to its commodities topromote sustained growth, jobs and economictransformation.

While African commodity-exporting economieshave benefited greatly from recent sustainedincreases in the price of their primary commodityexports and an increase in resource rents, theserents cannot be relied on as an engine of growthand development. This is not only becausecommodities are exhaustible but also because

adding value would help African countries toreduce exposure to the risk of commodity pricefluctuation and at the same time move to higher-value and more diversified product- and end-markets where prices are more dependent onmarket fundamentals than speculation.

Indeed, the entry of financial agents on thespot and futures markets and the resultingfinancialization of commodity trading havefrequently caused these markets to move from a

price-taking environment to one of market power,partly because they are highly concentratedand often laced with information asymmetry.Financial agents have become key players indriving speculation and herd behaviour, and havedistorted commodity markets including upwardshifts in coffee and cocoa prices and all-time lowprices for cotton.

This behaviour has left African countriesmore vulnerable to fluctuations in commoditymarkets, whereas artificially high prices forsome commodities have reduced incentives forvalue addition. Promoting commodity-basedindustrialization could offer a powerful toolfor African countries to tackle this tyranny offinancialization. Equally, production of manycommodities is capital intensive, holding backemployment and the distribution of their rents. Amore sustainable, inclusive and equitable growthpath in commodity-exporting economies lies inthe possibilities of building backward and forwardlinkages for commodity production.

One upshot of the above factors is that,although Africas growth exceeded the worldaverage in the 2000s, it did not translate intocommensurate poverty reduction at a time when

poverty elsewhere fell heavily, skewing the globalpoverty reduction picture. Similarly, the globaldispersion of production has led to unequalbenefits, benefiting east and south-east Asianeconomies, especially China, the most.

So, how can Africa avoid marginalizing itselffrom the world economy and achieve inclusiveeconomic growth? The 2013 edition of theEconomic Report on Africa, themed Makingthe most of Africas commodities: Industrializingfor growth, jobs and economic transformation,

argues that one answer lies in effective industrialpolicies and commodity-based industrialization,strengthening industrial linkages to thecommodity sector.

The conventional wisdom in the resourcecurse literature argues differentlythatcommodities are an undesirable form ofeconomic specialization undermining the viabilityof industrial activityalthough global economicdynamics now suggest that this trade-offbetween commodities and industry no longerholds. The shift in global economic gravity fromhigh-income Northern to low-income Southerneconomies suggests a reversal in the long-termdeclining trend in the commoditiesmanufacturesterms of trade. More important, on top of offeringshort- to medium-term comparative advantages,commodity-based industrialization can, with theright industrial policies, serve as a launching padfor long-term diversification and competitivenessin new and non-commodity sectors in Africascommodity-rich countries.

On top of offering short- to medium-term comparative advantages,commodity-based industrializationcan, with the right industrial

policies, serve as a launching padfor long-term diversification and

competitiveness in new and non-commodity sectors in Africascommodity-rich countries.


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Moreover, the past decade has seen a majorshift in the structure of global value chains(GVCs) in many sectors, as major firms seekto outsource non-core competences, and thuspromote linkages. This suggests that we may beentering a new era in the relationship betweenthe exploitation of commodities and the growthof industryif African governments put inplace policies to facilitate and accelerate suchdynamics. As firms that control GVCs cannot berelied on to promote linkages beyond their owninterests, African governments need to makestrategic interventions to empower indigenousfirms to insert themselves and compete inregional and global value chains.

The desire by African governments to promotelinkages from the commodity sector is not newand the continent offers many successful sectorand country experiences. Mauritius provides agood example of a country that successfullydeveloped visions and long-term strategies tomove from a degree of high production and exportconcentration in 1980 to wide diversificationthree decades later. Changes in the nature of

globalization in the current era have openedstill-unrealized opportunities for increasing localindustrialization linkages.

Against this backdrop, the report examineskey constraints and opportunities for Africancountries to make the most of their commoditiesby adding value through linkage development. Itthen addresses how African countries can designand implement industrial and other developmentpolicies to promote value addition and economictransformation, and to reduce their dependence

on producing and exporting unprocessedcommodities.

The analysis uses desk research and country-specific background policy information,primary firm-level data and information fromquestionnaires and interviews to underpinevidence-based policy recommendations. Theprimary data were collected and country casestudies prepared for nine African countries inthe five subregionsAlgeria, Cameroon, Egypt,Ethiopia, Ghana, Kenya, Nigeria, South Africa andZambia.

As in previous years, the report begins byexamining recent trends in Africas economicand social development as well as selectedissues, namely trade and financing for economictransformation and the question of how to

translate growth into decent job creation,before focusing on Making the most of Africascommodities: Industrializing for growth, jobs andeconomic transformationa very brief synopsisof which is distilled into the following paragraphs.

MAKING THE MOST OF AFRICASCOMMODITIES: CONSTRAINTS ANDOPPORTUNITIES

Some of the nine countries show evidence ofmaking progress in developing local linkages(backward and forward) from the hard, energyand soft commodity sectors. But value additionis still limited and the depth of linkages variesamong countries, mainly because of country-or industry-specific constraints that cannot beovercome by market forces and that call forstrategic and systematic industrial policies. Eventoday, up to 90 per cent of the total incomefrom coffee goes to rich consuming countries

underscoring the benefits African countries arecurrently forgoing.

The following are the key findings of the reporton value chain linkages.

THE BIG DIFFERENCES IN SOFT, HARDAND ENERGY COMMODITY SECTORSAFFECT HOW LINKAGES DEVELOP

Most soft commodities, as against hardcommodities, have low technological content,

African governments need to put inplace policies to facilitate linkagedevelopment. As firms that controlGVCs cannot be relied on to promotelinkages beyond their own interests,

African governments need to makestrategic interventions to empowerindigenous firms to insert themselvesand compete in regional and globalvalue chains.


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lend themselves to small-scale production, arelabour intensive, require a heterogeneous anddiffused infrastructure and rarely stay fresh intheir natural state, requiring early processing.

Hard commodities generally embody morecomplex technologies and require intensive useof large infrastructure (such as roads, railwaysand ports) that can be used for developingother sectors. Energy commodities are mainlyvery technology, scale and capital intensive,requiring infrastructure of less use to othersectors.

ESTABLISHING MARKETING LINKS AND

STAYING IN GVCS IS ESSENTIAL, BUTREQUIRES SYSTEMATIC INVESTMENTAND SUPPORT

Searching for buyers is a costly exercise forany firm, but a firm must be inserted in regionaland global value chains. Building these linkagesrequires appropriate domestic strategicgovernment support for firms to be globallycompetitive in critical success factors such asprice, quality, lead times, dynamic capabilities and

compliance with technical, private, health andenvironmental standards. Linkage developmentis thus a progressive and cumulative process,and requires continuous investment intechnologies, research and development andskills, among other elements.

ALL LINKS IN THE VALUE CHAINREQUIRE SUPPORT TO UPGRADE

Trade-offs between the links may, though, beneeded. For example, because output from thefood commodity sector can vary enormouslyin quality, price and technical specifications,adding value in agro-processing normallyrequires support at different stages, includingproduction, marketing, storage and transport. Toavoid unintended negative impacts on producersin other links, strategies that target processingindustries must be integrated with interventionsat the commodity-producing and primary-

processing stages.

REGIONAL MARKETS MAY OFFER MOREOPPORTUNITIES THAN TRADITIONALMARKETS

Such opportunities are more apparent when afirm enters a GVC. Regional markets may beinitially less demanding and allow local firmsto build the necessary production capabilitiesrequired to graduate into more demandingglobal chains, a point particularly importantfor countries without large domestic markets.The regional approach opens up space forensuring that regional integration within Africais fast-tracked and streamlined to provide localcompetitive advantage.

TRADE AGREEMENTS WITHTRADITIONAL INDUSTRIALIZEDCOUNTRIES AND EMERGING PARTNERSARE IMPORTANT FOR ENTERING NEWMARKETS

African countries need to improve marketaccess for their value-added productsthrough agreements with traditional andemerging partners. Their strategies, based ona united framework for negotiation, shouldaim to maximize the development impact ofpartnerships and, specifically, to reduce hightariffs (on cocoa to India, for example) andremove tariff escalation (in the European Union,for instance).

MAKING THE MOST OF AFRICASCOMMODITIES: A POLICY FRAMEWORK

The report identifies factors that influence

linkage breadth and depthtechnical featuresof the value chain, industry structure, lead-firm strategies for their critical successfactors, location and infrastructure, a variety ofconstraints (trade restrictions, standards), andgovernment industrial policy. The unevenness ofdevelopment among countries is attributed totwo primary sets of linkage driversstructuraland country-specific.

Structural drivers refer to the age of thecommodity-exploiting sector and sectoral factors


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such as the requirement for just-in-time andflexible logistics, the characteristics of commoditydeposits, and the sectors technological complexity.By their very nature, these drivers are difficult toinfluence through policy interventions. Country-specific drivers, on the other hand, are much easierto influence by government policy, and refer tofactors dependent on national context, such asinfrastructure and human resources.

There is no one size fits all policy approachfor commodity-based industrialization in Africancountries, or anywhere for that matter, andgovernment policy should be country specificand evidence based. It should also have clearpriorities, designate institutional steps to ensure

responsibility for implementation across ministriesat central or local levels, and be backed bytransparent budgets.

The key policy recommendations for adding valueand industrializing in Africa follow.

ADOPT AND IMPLEMENT A COHERENTINDUSTRIAL POLICY

If African governments want to speed up anddeepen value addition of local production linkagesto the commodity sector, and to embark on acommodity-based industrialization path, theymust adopt a strategic approach and work closelywith all stakeholders to formulate and implementindustrial policy. The policy should start byidentifying value addition or linkage opportunitiesas well as medium- and long-term interventions.

CREATE APPROPRIATE INCLUSIVEAND TRANSPARENT INSTITUTIONALINDUSTRIAL-POLICY MECHANISMS

It is critical for governments to develop prioritizedcountry-specific, industrial-policy roadmaps forvalue addition, working closely with stakeholdersincluding representatives of firms and of researchand innovation institutions. They should set upa multi-stakeholder institutional council thatfocuses on developing linkages to the commoditysector, led by the most appropriate governmentdepartment (usually the ministry of industry). This

council should be charged with developing a joint,strategic vision for industrializationgatheringthe most reliable information and elaborating anappropriate step-by-step linkage strategy. Thestrategy should outline support mechanismsincluding responsibilities, activities, outputs andmilestones.

DEVELOP AN APPROPRIATELY DIRECTEDLOCAL CONTENT POLICY

Local content policies have probably been thesingle most important policy driver of linkages fromthe commodity sector. World Trade Organization

rules provide some legal leeway to least-developedeconomiesand many countries anyway find real-world mechanisms to push through and sustainlocal content policies. Policies should focuson adding value locally (rather than satisfyingspecial interest groups), removing red tape andstreamlining regulations, as well as securingtechnical and financial assistance for developinglinkages.

ADOPT STRATEGIC INTERVENTIONS TOINSERT INDIGENOUS FIRMS IN SUPPLYCHAINS

Following the dynamics of national, regional andglobal value chains, it is in the interests of majorcommodity firms to outsource many of theirsupplies and services. Industrial policy shouldcover customized supply-chain developmentprogrammes that help indigenous firms toinsert themselves in these value chains and to

remain competitive. Such policy may focus onupscale niche markets and quality certificationenvironmental sustainability, speciality productsor fair tradeas well as on special fundingmechanisms to build firms capabilities in backwardand forward linkages.

BOOSTING LOCAL SKILLS ANDTECHNOLOGICAL CAPABILITIES

Skills shortages are often a binding constrainton developing industrial linkages in Africa.


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They hamstring local suppliers in upgradingoperational competitiveness, meeting technicalrequirements, innovating, adopting world-classmanufacturing practices and running supply-

chain and customer-management programmes.Backward linkage development to the hardcommodity sector is particularly demanding oftechnological capabilities to compete with globalsuppliers. Building necessary skills requirescoordinated support from other firms, thegovernment and donors. Government supportmay include matching-grant programmes forskills development for local firms, creation oftechnical training institutions and staff hires.

ADDRESS INFRASTRUCTURECONSTRAINTS AND BOTTLENECKS

Infrastructure deficits affect not only cross-border infrastructure but also feeder roadslinking agricultural producers to processingcentres. Infrastructure development helps toease these bottlenecks, and has spin-offs for

jobs for unskilled and semi-skilled workersas well as for training for those with higher

artisanal skills. Industrial and development policyin Africa should include strategic investment ininfrastructure and avoid enclave infrastructureprojects and programmes aimed only atsatisfying the needs of commodity producers.Governments should use commodity access tosecure favourable financing (of infrastructurein bilateral agreements), to leverage publicprivate partnerships (to facilitate infrastructureprovision) and to restructure institutions thatprovide soft infrastructure (to simplify and makethe regulatory framework effective, efficient andbusiness friendly).

IMPROVE POLICY IMPLEMENTATIONTHROUGH COORDINATION AMONGMINISTRIES

Value chains are cross-cutting, ministries arenot. A commodity-based industrial strategynecessarily requires inter-departmental

direction and implementation. Soft commoditiestend to fall under the mandate of agricultureministries and hard commodities under mining

and oil ministries; industrial policy requiresthe involvement and direction of ministries ofindustry, besides the budgetary allocations forimplementation. Effective policy implementation

therefore requires coordination across ministriesand departments in the context of broadernational development plans and frameworks thatensure participation of the private sector andother stakeholders.

NEGOTIATE REGIONAL TRADEARRANGEMENTS AND FOSTER INTRA-AFRICAN TRADE

Regional markets can be important in facilitatinglocal production linkages both within andbetween African countries. It is extremelydifficult to export to high-income, industrialized-country markets as their critical successfactors are often beyond the immediate reachof many domestic firms. Regional markets areoften less demanding and provide learningopportunities for domestic firms to build theirproduction capabilities step-by-step. They alsoallow them to build economies of scale, some

degree of specialization between countries andfunctional upgrades through regional countryof origin brandinghence greater returns.African countries should therefore fast-trackimplementation of the Continental Free TradeArea agreement and accelerate that of regionaltrade arrangements to reduce or eliminatenon-tariff barriers, sanitary and phytosanitarymeasures, and technical barriers to trade. Theyshould also improve regional infrastructure andharmonize customs procedures.

MAKING THE MOST OF REGIONALPOLICY FRAMEWORKS

To be effective and improve coordination atregional and continental levels, national industrialdevelopment frameworks in Africa should, as faras possible, be closely aligned with the prioritiesof the Accelerated Industrial Developmentof Africa Action Plan, endorsed by African

Ministers of Industry in 2007. This identifiespriorities for action at national, regional,continental and international levels, including


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product and export diversification policy, naturalresource management and value addition innatural resources, infrastructure, human capitaland technology, institutional frameworks and

resource mobilization.To cater to domestic and export markets, thisreport recommends that national value-addingstrategies should also be closely coordinated toboost efforts by African countries to promotestrategic commodities such as rice, legumes,maize, cotton, palm oil, beef as well as dairy,poultry and fishery products at continental level,and cassava, sorghum and millet subregionally.

... AND FINALLY

The findings and recommendations of thisreport strongly complement those of previousyears that emphasized the need for Africancountries to pursue effective policy actionsto address the factors constraining economictransformation. For example, the 2012 report

pursued the theme that, to address thefailures of state-and market-led developmentexperiences and to unleash Africas potential asa pole of global growth, the continent required

developmental states that design and implementinnovative and bold long-term actions.

This report underscores the point that commodity-based industrialization in Africa should notandcannotbe the only way for African countriesto industrialize. Not all African countries arerich in natural resources and, in the long-term,even resource-rich countries have to ventureinto innovative non-resource-based activitiesto sustain their industries when resources areexhausted.

Africas industrialization is likely to take placein a changing globalized economy full ofuncertainties. African governments shouldtherefore work together to develop a unitedvision on how to influence the global economicagenda and, in so doing, shape the outcomes ofglobalization itself. The time has come for Africato stop being a bystander to its own destiny.


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Economic and Social Developments inAfrica and Medium-term Prospects


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MINIMIZING GENDER

DISPARITIES WILL ENHANCETHE PRODUCTIVE BASE OF THELABOR FORCE.

Enhancingh

umancapit

alwillprom

oteproduct

ivitywhichi

s

vitalforecon

omictransf

ormation.

Africas medium growth is subject to internal and externaldownside risks such as internal conflicts and wars and theeuro area debt crisis.

MEDIUM

GROWTH

AFRICAN COUNTRIES AREGROWING BUT HAVE BEENUNABLE TO FULFIL THEIRINDUSTRIAL POTENTIAL.

INTE

RNAL

CONFLICTS

EXTERNAL

CONF

LICT

S

RISKS

EXP

ORTS

PRODUCTIVITY

ECONOMICTRANSFORMATION

Despite the difficulties in the global economy,Africas growth remains relatively strong.


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AFRICAN COUNTRIES REQUIRE ROBUST, BROAD-BASED ANDINCLUSIVE ECONOMIC GROWTH FOR A LONG PERIOD.

THEY HAVE A REAL OPPORTUNITY, INDIVIDUALLY ANDCOLLECTIVELY, TO PROMOTE ECONOMIC TRANSFORMATIONTHROUGH COMMODITY-BASED INDUSTRIALIZATION AND TOADDRESS POVERTY, INEQUALITY AND YOUTH UNEMPLOYMENT.

Economic transformation will createjob opportunities for the youth andunleash Africas growth potential.

JOBS OPPORTUNITIES

JOBS

OPPORTUNITIES

OPPORTUNITIES

OPPORTUNITIES

OPPORTUNITIES

JOBS

JOBS

JOBS

GROWTH POTENTIAL

JOBS

RESOURCES

Africas growth is heavily dependent on primarycommodity exports.

BROAD-BASEDANDINCLUSIVEGROWTH


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The world economy showed signs ofdecelerating in 2012, threatening the paceof the recovery from the global financial

and economic crisis of 20082009. The euro

area, Africas biggest economic partner, headedfor another recession with lingering worries overmounting sovereign debts and fiscal sustainability.Emerging economies, such as China and India,saw notably slower activity. Prospects of an earlyexit from the turmoil are clouded by uncertaintyover the euro area sovereign debt crisis, fiscalconsolidation in major world regions and thebrinksmanship of negotiations over the fiscal cliffand debt ceiling in the United States (US). Theyhave induced downside risks in an already fragileglobal economy.

Africas economic growth picked up in 2012 towell above the worldwide average, despite theseglobal headwinds. The recovery in many Africancountries was underpinned by a variety of factors,including high demand and prices for commoditieson international markets, strengthening domesticdemand associated with rising incomes andurbanization, increasing public spending (especiallyon infrastructure), bumper harvests in some regions(due to favourable weather), tightening trade and

investment ties with emerging economies (linkedto their investment in Africas natural-resource andextractive industries), and post-conflict economicrecovery in some conflict countries.

The continents medium-term growth prospects arepositive, although it faces risks such as reliance ontraditional rain-fed agriculture, political instabilityand social unrest in some of its countries anduncertainty due to the global economic outlook.

Yet most African economies still depend heavilyon commodity production and exportsdespitediversifying into non-primary commodity sectorssuch as manufacturing and serviceswith limitedvalue addition and few forward and backwardlinkages to other sectors of the economy. Thisstructural weakness has prevented them fromtransforming growth into commensurate jobs andfaster social development. Indeed, the pattern ofsocial development trends in Africa has been mixed

over recent years: positive changes continue to berecorded in most areas but the pace of progressis slow and insufficient for African countries toachieve their social development goalsespecially

the Millennium Development Goals (MDGs) by theoriginal date of 2015.

Value addition and structural transformation are,though, essential for these countries economiesto accelerate and then sustain broad growth; toimprove social conditions by creating jobs, loweringinequality and cutting poverty; and to reduce theirvulnerability to external shocks.

Boosting value addition appears to be an areaof priority both in the development discourse

and for stakeholders involved in consultations onthe post-2015 development agenda organizedby pan-African bodies, including the UnitedNations Economic Commission for Africa (ECA)and the African Union Commission (AUC). Thepreliminary findings of their consultations indicate apreference for an agenda that prioritizes structuraltransformation and inclusive growth, with a focuson promoting agriculture, manufacturing, technologyand innovation, and human development.

1.1 AFRICAS ECONOMIC PERFORMANCEIN 2012

The recovery strengthened as politicaltensions eased in North Africa

The economic recovery in Africa strengthened in20121to 5 per cent (figure 1.1), despite a slowingworld economy. Political turmoil and tensions inNorth Africa began to easedemocratic electionswere held and new leaders inaugurated in Egyptand Libyaand normal economic activity beganto return. Africas medium-term growth prospectsremain strong at, for example, 4.8 per cent in 2013and 5.1 per cent in 2014.

Commodity production and exports stayedessential for growth on the continent, althoughmany countries are diversifying their economiesand sources of growth. Thus in 2012 growth was


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08

06

04

02

00

-02

-04

FIGURE 1.1: GDP GROWTH, 20082012

RealGDPgro

wthrate(%)

2008 2010 2011 2012

Years

strong in both commodity-rich and resource-poorcountries, although of the two sets the oil-exporterssaw growth rising slightly faster, thanks toincreased oil production and high prices.

African growth also continued to benefit fromimproved macroeconomic management andprudential macroeconomic policies that underpinnedstrong public spending, especially on infrastructureand public services. Rising domestic consumptionand investment demand, fuelled by rising incomes

and urbanization, accounted for more than halfthe growth in many African countries in 2012.Indeed, disaggregating the components of realgross domestic product (GDP) growth, privateconsumption was the key growth driver in Africain 2012, followed by gross fixed investment andgovernment consumption (figure 1.2). Gross fixedinvestment and exports recovered strongly in NorthAfrica in 2012, but the contribution of gross fixedinvestment to real GDP growth declined in the restof Africa as the external balance narrowed.

2009

Source: Calculations based on UN-DESA (2012).

World Developing economies Africa


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Africa, excluding North Africa

North Africa

FIGURE 1.2: COMPONENTS OF REAL GDP GROWTH, 20082013

ContributiontorealGDPgrowth,

%

Contrib

utiontorealGDPgrowth,

%

Source: Calculations based on EIU (2012).

5

4

3

2

1

0

-1

-2

-3

3

2

1

0

-1

-2

-3

-4

2008 2010 2011 201320122009

2008 2010 2011 201320122009

Private consumption Government consumption Gross fixed investment External balance


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24

With the global economy forecast to grow at 2.4 per cent in 2013 and 3.2 per cent in 2014, theworst of the sovereign debt crisis might be over, and most developed and emerging countries areexpected to return to their growth trajectories in the medium term.

Inflation

World inflation declined from 3.6 per cent in 2011 to 2.8 per cent in 2012, and is expected tosteadily decline to 2.6 per cent in 2013, mainly on sluggish aggregate demand, quantitative easingin the US, and ultra-low interest rates and extremely accommodative monetary policy stances inmost countries. The combination of a weakened economic environment and falling inflation willenable governments in the US and euro area to allow further monetary easing, supporting therepair of private sector and bank balance sheets.

Fiscal trends

Fiscal balances improved in almost all major economies and regions, reflecting fiscal consolidationand austerity measures, although the pace may be derailed by economic and social pressures inmany developed countries. Advanced economies cut their overall deficit from 6.5 per cent of GDPin 2011 to 5.9 per cent in 2012, with the US at 8.6 per cent and Japan at more than 10 per centof GDP that year.

Fiscal positions for some developing regions such as the Latin America and the Caribbeanstrengthened as most countries continued their cautious fiscal policies while rebuilding fiscalbuffers, aided by favourable export revenues.

Countries in the euro area are expected to reduce their overall fiscal deficit by only 0.8 per cent ofGDP in 2013. In developing countries, fiscal deficits in 2013 are forecast to decrease, except inthe Middle East and North Africa owing to reduced oil revenues caused by supply-side disruptionsto oil production.

Commodities

The all-commodity price index increased in the first quarter of 2012, reaching a year-high of 202in March 2012 as demand from developing countries rose. The world crude oil price remained highat around US$109.9 per barrel in 2012 compared to US$107.5 in 2011. The food price indexsurged after July as severe weather hit crops, especially in the US. Prices of sugar, cereals and ricerose the sharpest, while meat and dairy prices remained fairly flat. The index for agricultural rawmaterials and products such as coffee, rubber, cotton and beverages declined in 2012.

Most global commodity prices are expected to stay high in 2013, despite global economic growthbelow potential, owing to limited supply and weather risks stemming from global climate change.

External balances

World exports grew by only 5.0 per cent by value in 2012, much less than previous years 17.3 per cent,as import demand from major developed countries sharply contracted. Current account balances formajor economies and regions narrowed slightly in 2012, reflecting a decline in international trade anddecelerating global demand, rather than any improvement in structural imbalances (UN-DESA, 2012).


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The US dollar and Japanese yen appreciated in the first half of the year, as the euro area debtcrisis drove up global investors risk aversion and induced an appetite for safe-haven currencies.Global FDI moderated in 2012, while global remittance flows rose by 6.4 per cent (chapter 2).

Medium-term risks for the global economy

The greatest risks are difficulties in the euro area, uncertainty over tax reforms, spending cuts, thedebt ceiling and high household indebtedness in the US, fiscal consolidation in most industrializedcountries, economic slowdown in emerging countries and political instability, especially in theMiddle East.

Policies to rectify global imbalances and ensure sound fiscal and monetary health in the globalfinancial infrastructure remain crucial to restoring global health. The European Central Bank, forinstance, has launched major policy interventions to calm the escalating crisis. These policies will,however, need to be accompanied by long-term structural reform to restore confidence in the

financial sector and steer the global economy to long-term growth.

Such trade and investment ties and sources ofgrowth will undoubtedly assist the continent toreduce vulnerability to external shocks and toexpand opportunities for faster, sustainable andmore equitable growth.

Largely stable, shared and robust growth

Growth has been widely shared and remainedstrong across the majority of African countries,

despite the disruptive impact of the globaleconomic and financial crisis, and the politicalturmoil in North Africa. More than a third ofAfrican countries grew at 5 per cent or more in2012, with a large proportion achieving this rate

over 20102012 (table 1.1). This underscoresthe growing potential of African countriesto accelerate and then sustain growth in theforeseeable future.

Real GDP growth 2010 2011 2012

Oil exporters Oil importers Oil exporters Oil importers Oil exporters Oil importers

Less than 3% 1 9 6 7 4 9

35% 7 8 4 16 3 17

57% 2 13 1 10 3 6

More than 7% 3 10 2 7 3 8

Total 13 40 13 40 13 40

TABLE 1.1: DISTRIBUTION OF GROWTH PERFORMANCE IN AFRICA, 20102012



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Per capita GDP growth

Africas population growth is estimated at above2 per cent a year, but with projected increases ineconomic growth, per capita GDP is likely to riseover the medium term (AfDB et al., 2012). Indeed, in2012 the continents per capita GDP was estimatedat around 3 per cent. However, while this suggeststhat the standard of living in African countries hason average been improving, the pace is very slowgains in social conditions are failing to match thecontinents robust economic performance.

Subregionally, West Africa and East Africa continuedto register real per capita GDP growth of more than3 per cent, followed by Central Africa and Southern

Africa. North Africa (excluding Libya) was the onlysubregion experiencing a contraction because of theoverall slow recovery from the civil war in Libya andpolitical turmoil in other countries such as Egypt andTunisia. Still, average per capita GDP has continuedto grow in resource-exporting countries over the

last decade. With the right policy framework, thisprogress, if sustained, has the potential to reversethe resource curse that has blighted many Africancountries. Governments need to pursue policies that

reduce inequality, promote job creation and increasesocial protection in order to make growth moreconducive to social development (chapter 2).

Growth showed geographical variations

Real GDP growth varied among groupings,subregions and countries, but remained fairly strongin both oil-exporting and oil-importing countries.

Oil exporters and importers

Oil-exporting countries as a group recoveredstrongly in 2012 (6.1 per cent) as some countriespolitical situation improved (especially in NorthAfrica), oil production increased (in many countries)and oil prices stayed high on international markets(figure 1.3).

FIGURE 1.3: AFRICAN GROWTH BY OIL EXPORTERS AND IMPORTERS, 20082012

RealGDPgrowthrate,

%

Years

07

06

05

04

03

02

01

00

-01

-02

-032008 2010 2011 20122009


Oi l exporting countr ies Oi l importing countries Africa


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African subregions

Oil-importing countries experienced a declinein growth to 3.7 per cent in 2012 from 4.5 percent in 2011. Despite the reduction, the groupmaintained robust growth thanks to a variety

of factors, including strong demand and highprices for non-oil commodities and improvedperformance in agriculture, services and othersectors. Strong non-oil based growth adds to thegrowing momentum of economic diversificationin African countries. Countries like Kenyaexperienced strong recovery from the end of

drought, and post-conflict recovery in othercountries contributed to the impressive growthrates experienced in this group.

Subregional trends

Growth rates also varied in 2012 by subregion, butremained robust in all of them (figure 1.4). WestAfrica registered the highest growth, followed byEast Africa, North Africa including Libya,2CentralAfrica and Southern Africa.

Economic performance in West Africa moderatedto 6.3 per cent in 2012 from 6.5 per cent in 2011.Nigeria, the continents second-largest economy,slowed to 6.4 per cent from 7.4 per cent, reflectingreceding fiscal stimulus and slowing oil investmentson security concerns across the Niger Delta. Ghanaseconomy, after a sharp increase in 2011 when thecountry launched commercial oil production, slowed

from 15.1 per cent in 2011 to a more realistic 7.4 percent in 2012.

Political instability in Guinea-Bissau and Maliaffected subregional growth, and both countriessaw growth decline by more than 4.4 percentagepoints, but this was balanced by growth in SierraLeone of 26.5 per cent owing to the discoveryof new oil deposits. Cte dIvoire posted 7 percent post-conflict growth with a return to normalharvests. A growing pace of the extractive

industry in oil supported Nigers 9.1 per centexpansion.

FIGURE 1.4: GROWTH BY SUBREGION, 20082012

Rea

lGDPgrowthrate,

%

08

07

06

05

04

03

02

01

00

-01

-02Africa West Africa Central Africa East AfricaNorth Africa Southern Africa


2008 2009 2010 2011 2012


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production increased from 0.5 million barrels perday at end-2011 to 1.42 million by July 2012(World Bank, 2012). Tunisias economy switchedfrom a 1.7 per cent contraction in 2011 to 2.6

per cent growth in 2012, reflecting a recoveryin tourism, exports and FDI. Despite a partialshutdown of a key refinery, Algeria sustained itshigh level of oil production and expansionary fiscalpolicy, recording growth of 2.8 per cent. In Sudan,however, the economy contracted steeply by 11per cent owing to the political environment, civilwar, a sharp fall in oil production, exchange ratedepreciation and escalating inflation. Mauritaniasaw growth slip to 4.8 per cent in 2012 from5.1 per cent in 2011, though it was still robustthanks to investment in mining and strong public

spending.

High youth unemployment remains an issue for thesubregion. Reducing joblessness for all age groups

requires structural labour market reforms, restorationof market confidence, inclusive growth, refurnishedforeign exchange reserves and maintenance ofpolitical and social stability.

In 20082012, the top 11 growth performers inAfrica reached the 7 per cent threshold estimatedas a prerequisite for achieving the MDGs, withEthiopia and Sierra Leone the top two (figure1.5). Ethiopias growth has been propelled byincreased public and private investment, improvedmacroeconomic management and increasing rolefor manufacturing and services sectors amongother factors, while growth in Sierra-Leone mainlyreflects postcivil war recovery and naturalresource discoveries and exploitation. The list

of top performers underscores the centrality ofcommodity production and exports. The majorityof these countries are heavily dependent on oil orminerals (or both).4

FIGURE 1.5: TOP 10 AND BOTTOM 5 PERFORMERS, 2008-2012(AVERAGE % ANNUAL GROWTH)

00 02 04 06 08 10 12

Ethiopia

Sierra Leone

Libya

Ghana

Rwanda

Liberia

Malawi

Zimbabwe

Nigeria

Mozambique

South Africa

Comoros

Madagascar

Sudan

Swaziland



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Inflation varied among African countries andsubregions, and was 40 per cent in Sudan. Despitetightening its monetary policy, East Africa had thehighest subregional rate (14.2 per cent) because

of the effects of the previous years severe droughton agricultural produce and uncertain weather.Ethiopia had the highest inflation (25 per cent) inthe subregion. In Central and West Africa rates weremainly in single digits, apart from Sierra Leone (12.6per cent) and Nigeria (12.5 per cent).

Inflation is expected to decline further, owing totightening monetary policy and improving weather,especially in East Africa and the Horn of Africa.

Prudence ruled the macroeconomic policy

stance

Owing to the adverse global economic environmentand narrower macroeconomic space compared withthe pre-crisis era, many African countries followedcautious macroeconomic policies in 2012. Inresponse to inflationary pressures, Ethiopia, Kenya,Nigeria, Tanzania and Uganda tightened monetarypolicy in 2012, but others such as the Franc Zonecountrieswhere average inflation of 3.9 per centin 2012 was Africas lowesteased theirs. The

pressure on central banks to tighten monetary policy

waned as non-oil commodity prices began to fall insome countries with improved rainfall and increasedagricultural production. The central banks of SouthAfrica and Morocco lowered interest rates to boost

domestic demand and growth (EIU, 2012).Most African countries continued their expansionaryfiscal policies, supported by rising commodityrevenue, with a strong focus on increasing publicspending on infrastructure. As part of the drive toreduce dependence on external assistance andmobilize domestic resources, tax efforts pickedup in many countries (see chapter 2). Supportedby strong economic growth, many governmentswidened the tax base and improved tax collection andadministration.

The average central government fiscal balancenarrowed moderately from a deficit of 3.5 per centof GDP in 2011 to a deficit of 3.0 per cent in 2012(figure 1.7). It improved considerably for oil-exportingcountries as a group, as oil production recovered witheasing political tensions (and despite rising publicspending on social security). The average worsenedfor oil-importing countries, however, as energy pricesrose on the world market, demands for infrastructureinvestment increased and ODA declined or stagnated

(on weak growth in developed economies).

FIGURE 1.7: AFRICAN CENTRAL GOVERNMENT FISCAL BALANCES BY COUNTRY GROUP,20082012

Centralgovernmentfisica

lbalance

(%o

fGDP)

Years

06

04

02

00

-02

-04

-06

2008 2009 2010 2011 2012e

Source: Calculations based on EIU (2012).

Oil exporting countries Oil importing countrie Mineral-rich Non-mineral, non-oil rich Africa

e = estimated.


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Many governments maintained accommodativefiscal policies owing to the significant requirementof public investments in areas of infrastructure andemployment creation. Recent discoveries of minerals

in several African countries are expected to furtherexpand fiscal space as well as public spending incountries such as Ghana, Kenya, Mauritania andUganda.

External positions continued divergingbetween oil exporters and importers

Africas current account deficit widened from1.2 per cent of GDP in 2011 to 1.6 per cent in2012 (figure 1.8) owing to sluggish externaldemand for exports. A notable variation was

seen between oil-exporting and oil-importingcountries. The former groups average currentaccount surplus remained at 2.2 per cent, similarto 2011. Oil-importing countries, on the other

hand, experienced expanding deficits (to 7.5 percent) as world energy prices increased. For manyoil-importers, the combination of rising and fairlyinelastic import bills and declining export growthtranslated into higher current account deficits.Depreciation of domestic currencies against theUS dollar and the effect of recession in Europefurther contributed to wider deficits in this group.The socio-economic gap between these twogroups may widen, as the oil-importing countriesface the dual pressure of rising oil prices andfalling external capital inflows (see chapter 2).

FIGURE 1.8: AFRICAN CURRENT ACCOUNT BALANCES BY COUNTRY GROUP, 20082012

Currentacc

ountbalance

(%o

fGDP)

Years

15

10

05

00

-05

-102008 2009 2010 2011 2012

Source: Calculations based on IMF (2012).

Oil exporting countries Oil importing countries Mineral-rich Non-mineral, non-oil rich Africa

1.2 MEDIUM-TERM OUTLOOK

The prognosis is good

Africas medium-term growth prospects remainrobust with average GDP growth (including

Libya) projected at 4.8 per cent for 2013 and5.1 per cent for 2014 (figure 1.9).5On topof the key growth factors that underpinnedAfricas economic performance in 2012, recentdiscoveries of natural resources will boostprospects.


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Robust domestic demand, especially privateconsumption and buoyant fixed investment ininfrastructure and extractive industries, as wellas high government spending, remains a keydriver of economic growth in Africa. Growth in

many countries is expected to continue benefitingfrom expanding agricultural output and furthermoves to diversify into servicesespeciallytelecommunications, construction and bankingand manufacturing. Still, commodity productionand exports are set to remain the key factorsunderpinning Africas medium-term growth.

Among the five subregions, West and East Africaare still expected to be the fastest growing at 6.6per cent and 6.0 per cent in 2013, followed by

Central Africa, North Africa and Southern Africa.

West Africa will continue to gain fromcommoditiesespecially oil and minerals as Ghana,Niger and Sierra Leone exploit new discoveriesand from cemented peace and stability in CtedIvoire.

Increasing economic diversity, rising agriculturaloutput and exports, as well as new natural-

resource discoveries are expected to boost growthin East Africa, which has remained one of thetop performing subregions. Consolidating peaceand ensuring political stability in the DemocraticRepublic of Congo and Somalia will help to improve

prospects in the subregion.

Central Africa is forecast to sustain moderategrowth of 4.7 per cent in 2013 and 4.4 per cent in2014, with strong commodity production and exportdemand, but the subregion is likely to be hit by anunfolding civil war in the Central African Republic.

Growth in North Africa (including Libya) is expectedto remain strong at 4.2 per cent in 2013 andpick up to 4.6 per cent in 2014 as the political

environment normalizes and economic activity gainsmomentum. The economy of Libya will recover topre-crisis levels and those of Algeria and Sudanshould benefit from better agricultural harvests.

Southern Africa is projected to grow at 4.0 per centin 2013 and 4.3 per cent in 2014. The economyof South Africa is forecast to grow at 3.1 per cent,reflecting a stabilizing international environmentand manufacturing.

FIGURE 1.9: GROWTH PROSPECTS BY SUBREGION, 20082013 (%)


2012 2013 2014

8,00

7,00

6,00

5,00

4,00

3,00

2,00

1,00

0,00

Africa West Africa Central Africa East AfricaNorth Africa Southern Africa


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Growth prospects for oil-exporting countries willremain robust (5.1 per cent) from sustained strongdemand for oil and high prices. Non-oil activitieswill contribute strongly to the economic outturn inseveral countries.

Africas average inflation is expected to declinein 2013 as global food and energy prices declineor stabilize and the effect of the drought fades.Assuming continued gains in macroeconomicmanagement, changes in the external environmentwill still have a strong influence on Africas internaland external balances. Fiscal budgets are expectedto remain under pressure, though, with revenuegeneration posing challenges for governments.Current account deficits are expected to continue

widening. External capital inflows, including ODA,FDI and remittances, are expected to fall slightlyunless the global economy recovers strongly in2013.

and would be better still if Africa made upits structural shortfalls

Africas growth outlook for 2013 faces severalinternal and external risks. Those on the internal

side stem mainly from weak institutional capacityand huge infrastructure deficits. Also, high income-inequality and poverty rates are creating political andsocial tensions in several countries, including SouthAfrica, where labour unrest is on the rise. Internalrisks also include political uncertainty associated withpresidential and parliamentary elections, domesticpolicy challenges and changes in the businessenvironment. Armed conflicts threaten peoplessafety as well as economic growth in countries likethe Democratic Republic of Congo and Mali. Badweather is another risk, as most countries remainheavily dependent on rain-fed agriculture.

External risks relate largely to slowing global growth(including major emerging countries) and the euro

area debt crisis. A steep global slowdown will affectgrowth in Africa through commodity prices, demandand capital flowsa 1 per cent decline in growth inthe euro area is associated with a 0.5 per cent fall ingrowth in Africa (AfDB et al., 2012). Slowing activityin emerging economies might deepen such effects,but their likely continued strong growth would helpAfrica to mitigate the effects of recession in Europe,given Africas increasing trade and investment tieswith them (box 1.2).

BOX 1.2: EMERGING MARKETS AND AFRICAS MEDIUM-TERM ECONOMICPROSPECTS

The role of SouthSouth cooperation in Africas development process, as outlined in the AccraAgenda for Action, is becoming more evident and taking centre stage as the euro area debt crisislooms and some major developed countries flirt with recession.

Although economic growth in the top five emerging countriesChina, India, Brazil, Republic ofKorea and Turkeycooled owing to the euro area crisis, optimism has returned. Growth in thesemarkets is likely to boost commodity demand, supporting a positive outlook for African economiesin 2013 and 2014, reflecting the fact that Africa is highly commodity dependent: the share ofcommodities in its merchandise exports is estimated at more than 65 per cent (UNCTAD, 2012).China has overtaken the US as Africas major trading partner.

The rebound of emerging countries is also likely to boost capital flows, especially FDI and ODA toAfrica, supporting government budgets and boosting investment, technology transfer and economicdiversification.


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Notwithstanding the positive outlook, Africas over-dependence on commodities makes it vulnerableto commodity price shocks. The continent thereforeneeds structural transformation (chapter 2) and

diversified products with value addition as a meansof mitigating the impact of volatility and fluctuationslinked to unprocessed commodity exports (chapter3). Industrialization in Africa can help to cushionagainst these effects, although trade barriers(chapter 2), unsound investment policies andtechnological challengesbeyond institutional andinfrastructure issueswill have to be resolved.

1.3 RECENT SOCIAL DEVELOPMENTS INAFRICA

Improving the social conditions of a society is vitalfor achieving economic transformation in Africa, yetthe continents social development pattern has notchanged much over recent years: positive changesare still recorded in most areaspoverty, hunger,education, health and equality for minoritiesbutprogress is slow and not commensurate with thestrides made in economic growth.6The achievementof most of the MDGs (by 2015 as initially set) is also

unlikely. Africas labour productivity remains low owingin part to poor levels of education and high prevalenceof diseases. Low human capital is underminingstructural transformation, and thus critical totransformation is enhanced labour force productivity,for which good health and quality education arecritical.

Economic advances are not reducing povertyas much as they should

Recent data show some slight improvement inpoverty reduction, even though the region will

not be able to achieve the related MDGs. Theproportion of people living in extreme poverty(below $1.25 a day) in Africa (excluding NorthAfrica) has been projected to reach 35.8 per cent in

2015 against the previous forecasts of 38 per cent(UN, 2011). This slight, albeit slow, improvement ispartly attributable to high and sustained economicgrowth since 2000.

Ethiopia, for example, which saw growthconsiderably above the required rate for eightyears between 2000 and 2010, experienced adramatic reduction in poverty, and the proportion ofthe population living on less than $1.25 a day fellfrom 55.6 per cent in 2000 to 39 per cent in 2005(World Bank, 2010).

Poverty in Africa is still spatial, and highlyprevalent in rural areas. The non-inclusive natureof economic growth and the more specificsectoral challengesof poor rural infrastructure,failure to modernize rural livelihoods, little jobsdiversification (for rural youth especially), limitedaccess to education and pervasive child labourare key drivers of rural poverty (FAO et al., 2010).

High inequality weakens the impact of growth

on poverty (Ravallion, 2001; Fosu, 2011).Further, the restricted range of drivers of growthexacerbates inequalities (ECA and AUC, 2012).The worlds widest urbanrural gaps are in Africa:for example in some countries, women in urbanareas are almost twice as likely as those in ruralareas to deliver their babies with a skilled healthattendant (ECA et al., 2012).

Social protection programmes can help to reduceinequality by providing transfers (including through

conditional cash transfers) to vulnerable groupsand enabling people to become productive

Africa should, though, consider emerging countries as complements to traditional partners andexport markets, rather than substitutes (AfDB et al., 2011). The heterogeneity of goods andservices traded with emerging economies presents an opportunity for Africa to add value to its

traditional commodity exports. This will require policymakers to adopt better engagement strategiesand incorporate them in their development agenda, synchronizing them at both the regional andcontinental level in order to attain lower production costs, better bargaining power, and strongerterms of trade with both traditional and emerging partners.


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members of society, but in Africa at least mostof them have worked through identified groups,rather than offering more transformative system-wide interventions. They are also fragmented in

most countries, often donor funded and outsidegovernment systems.

The battle against hunger needs a further,determined push

The food situation has generally improvedconsiderably in North Africa in recent years. Forthe rest of the continent, the Global Hunger Indexof the International Food Policy Research Institute7improved by 18 per cent in 19902011 (somewhatless than 25 per cent in Southeast Asia and 39 per

cent in North Africa). As with other indicators, theregional aggregate masks wide country divergence,as the Global Hunger Index in some countriesworsened while picking up strongly in others.Hunger remains linked to poverty, reflecting feweropportunities in rural areas.

The proportion of malnourished people in Africa(excluding North Africa) has stabilized at 16 percent, as gains in nutritional levels no longer pacepoverty reduction, partly owing to food prices,

which are still higher than before the crisis (FAOet al., 2010; UN, 2011). This has an effect onincome and other poverty correlates. Price volatilitymakes smallholder farmers and poor consumersincreasingly vulnerable to poverty, because foodrepresents a large share of the budget of poorconsumers and smallholder farmers income. Thuseven short periods of high prices for consumers orlow prices for farmers can lead to poverty traps, andfarmers are less likely to invest in measures to raiseproductivity when price changes are unpredictable.Price hikes can also prompt coping mechanismsthat defer educational and health spending byhouseholds, affecting overall welfare and long-termdevelopment.

Educational quality is a major drawback

Africa continues to make sustained progresstowards ensuring that all children can complete a fullcourse of primary schooling: aggregate net primaryschool enrolment in Africa rose from 64 per cent in2000 to 84 per cent in 2009. But 18 countries are

still more than 10 percentage points from achievinguniversal primary enrolment by the MDG target dateof 2015.

The MDGs emphasize primary enrolment, and mostAfrican countries have done well. The quality ofeducation, however, manifested by completion ratesand access to educational facilities has deteriorated.Primary completion rates in Africa are low: onlysix countries recorded primary completion rates of90 per cent or more in 2009. Also, many Africancountries have very high drop-out rates.

In secondary and tertiary enrolment, mostcountries are making slow progress. Vocationaland technical trainingreflecting a countrys

employment needsalso need to be prioritized bygovernments.

Health gains have to pick up pace

Health indicators remain the area in which Africancountries are making the slowest progress. Maternaland child health are a special concern for mostof Africa, as are communicable diseases such asHIV/AIDS, malaria and tuberculosis (TB). Whereascommunicable diseases are a large share of Africasdisease burden, as countries develop and lifestyleschange, communicable diseases such as cancer,heart disease and diabetes become more prevalent.Thus African countries must take pre-emptivemeasures to mitigate the double burden of disease,that is, the simultaneous burden of communicableand non-communicable diseases.

Child mortality

Most worryingly, of the 26 countries worldwide withunder-five mortality above 100 deaths per 1,000

live births, 24 are in Africa. Yet encouragingly,Africa has doubled its average rate of reductionin child mortality from 1.2 per cent a year in19902000 to 2.4 per cent in 20002010. Butto accelerate progress in child health, Africancountries should expand interventions that targetthe main causes of child mortality, and intensifyefforts to reduce neonatal mortality (deaths inthe first 28 days of life). The decline in neonatalmortality is much slower than that among olderchildren, perhaps due to lack of cost-effective

interventions such as early post-natal home visits,


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and can be tackled if governments and healthpractitioners link neonatal and maternal health.

Maternal mortality

Maternal health is still a grave concern for most ofAfrica, yet even here the most recent data from theWorld Health Organization (WHO) show one of thesteepest ever declines in Africas maternal mortalityratio: from 590 deaths per 100,000 live births in2008 to 578 in 2010a 2 per cent fall in two yearsand the endpoint of a 46 per cent drop since 1990(WHO et al., 2012).

Still, the fact remains that that of the 40 countriesclassified as having a high maternal mortality ratio

in 2010, 36 are in Africa. Some of these countriesare either experiencing or recovering from conflict,highlighting such countries vulnerability and theneed for health infrastructure.

To fast-track progress towards maternal health,African countries must look at the links betweenmaternal health outcomes and other social andeconomic indicators, such as education, womenseconomic empowerment, key infrastructure such asroads, telecommunications and transport, and healthsystems. It is also necessary to look at culturalpractices to improve contraceptive prevalencerates, the proportion of women making the WHO-recommended four antenatal care visits, the share ofwomen delivering with a skilled birth attendant, andbirth rates among adolescents.

HIV/AIDS

Africas progress in the fight against HIV/AIDS isnoteworthy. Although Africa (excluding North Africa)remains the region most heavily affected by HIV, the

number of new HIV infections has dropped by morethan 21 per cent, down to 1.8 million people newlyinfected in 2011, from an estimated 2.6 million atthe epidemics peak in 1997. The number of peopledying from AIDS-related causes fell to 1.2 million in2010 from a high of 1.8 million in 2005 (UNAIDS,2012). These falls show that prevention efforts havegreatly improved, as has treatment for people livingwith HIV/AIDS.

That said, Africa still holds an unbalanced burdenof the global population living with HIV/AIDS: with

12 per cent of the worlds population, the continentaccounted for about 68 per cent of people living withHIV/AIDS and 70 per cent of new HIV infections in2010. Women in Africa are particularly at risk60 per

cent of Africas HIV-positive population are women.To accelerate efforts, African countries must continueto focus on prevention, especially among women andyouth, and invest more resources into treating peopleliving with HIV/AIDS.

Malaria and tuberculosis

The fight against malaria in Africa is seeing majoradvances. Increases in funding and attention tomalaria control have led to a 33 per cent fall inmalaria mortality from 2000 to 2010much faster

than the global rate of 25 per cent. Yet althoughmalaria is preventable and curable, most of theworlds 200 million cases and 650,000 deaths in2010 were in Africa. Control strategies such asspraying and proper use of insecticide-treatedmosquito nets, as well as funding, are crucial.

In 2010, 27 countries in Africa adopted the WHOrecommendation to provide insecticide-treatednets for all people at risk for malaria, especiallychildren and pregnant women. The number ofAfricans protected this way rose from 10 million in2005 to 78 million in 2010. A continuing focus onprevention and expansion of treatment will haveprofound benefits, economic as well as health,given that malaria has an economic burden ofabout 1.3 per cent of GDP in countries with highdisease rates.

Incidence, prevalence and death rates associatedwith TB remain high and unchanging in most ofAfrica. Southern Africa has the highest prevalence,at more than 500 per 100,000 people, and thisrate has in fact increased since 1990 owingto continued chronic poverty and malnutritionalongside inadequate medical attention, especially

in conflict and drought-afflicted countries. TB is

African countries must take pre-emptive measures to mitigate thedouble burden of disease, that is, the

simultaneous burden of communicableand non-communicable diseases.


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closely linked to HIV, and so tackling HIV has apositive impact on lowering TB infections.

TB infection rates also depend on institutional andsocio-economic factors, such as crowded livingand working conditions and poor sanitation. Theyare also driven by inadequate health care accessas well as by, for example, malnutrition, diabetesmellitus, tobacco smoking, and alcohol and drugabuse. Thus TBs high and unchanging impactreflects numerous social and economic issues thatmust be addressed in the fight against the disease.

Programmes such as DOTS (directly observedtreatment, short course)the basis of the globalStop TB Strategyhave proved succes

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